I Admit It: Qihoo Is a Real Threat to Baidu

Qihoo's partnerships and pricing help rake in cash, which it'll use to compete with Baidu.

I don't like Qihoo360 (NYSE:QIHU), but I do realize when a company is here to stay.

If you've followed Qihoo over the past year, you may have heard how it seems to be more of a marketing company with inferior products rather than a serious tech competitor. Well, once you read its most recent earnings report, you may change your mind like I did. The fact is, Qihoo seems to be making profitable strides in the search market.

Before you invest in China's tech scene, here's how to think about Qihoo's long-term prospects.

(1) Qihoo's flagship anti-virus software essentially rates your computer as less "safe" if you haven't downloaded the company's 360 Browser. (2) In addition, the company prevents you from installing competitors' software by noting (fake) incompatibility.

While you may think this isn't a big deal, the Chinese government does. In February, it issued a public statement reprimanding Qihoo and warning it to stop. As Beijing doesn't seem to have issued any other statement, Qihoo seems to have stopped.

Although this could be a sign that Qihoo has changed, I don't think the company has. It seems embedded into Qihoo's DNA to skirt fair competition.

As far back as 2008 -- three years after the company's founding -- Qihoo decided that it would play the game differently. When transitioning into the browser space, Qihoo essentially stole Microsoft's Internet Explorer logo -- by simply adding a touch of green. Basically, the company was trying to trick users to download the 360 Browser.

Nonetheless, there are positives worth acknowledging about Qihoo's stock prospects.

How Qihoo is taking on BaiduIn its recent earnings report, Qihoo is estimated to have raked in $6 million from search advertising. This may seem small given that some reports say that Qihoo has about 12% of the search market, but you have to recognize two things.

First, Google is taking a cut of Qihoo's search revenue. Back on January 18, Google and Qihoo reached a sales agreement whereby Qihoo can use Google's ad platform to help sell some ads. In turn, Google receives a share of the revenue.

Second, Qihoo is taking in so little money because they're probably undercutting Baidu with cheaper ads. Last November, Qihoo CEO Zhou Hongyi said that he hopes to capture 15% to 20% of China's search market. So far, the company seems like it will soon hit that mark. In just a year, the company went from 0% to 12%. However, to push it farther, Qihoo will need incoming revenues to fund its growth. Given that the company has entered this space only recently, charging advertising partners less will help the company keep ahead of rivals like Sohu's Sogou and Baidu, which are in third place with 8% and in first place with 70% of the search market, respectively (according to CNZZ via Tech In Asia).

Put together, Qihoo's partnership and pricing tactics may be what it needs as search undergoes a shift to mobile. Since not even Baidu has figured out the mobile market yet, Qihoo has entered at an opportune time. If Qihoo can continue to accelerate its search presence, then this may be the beginning of the end for Baidu.

Is it time to buy Qihoo?While Qihoo has proven that it's here to stay, that doesn't necessarily mean that this is the best time to buy. I still have qualms about the company's product quality -- and you should, too. Until the company can show that it can build a better search engine and not simply grow by partnerships and pricing, I would hesitate to invest, especially since the stock is still trading at all-time highs.

Author

Kevin Chen covers the tech sector in China. With degrees in history and economics, he scours government sources, magazines, blogs, and earnings reports before making any investment decision. You can follow him at @TMFKang or on Google+.